Category Archives: China-U.S.

China And The United States: Reverse Merger

US President Donald Trump and China's President Xi Jinping walk in the grounds of Trump's Mar-a-Lago resort in Florida, April 2017.

SINCE AT LEAST World War 2, the lodestar of US foreign policy has been to steer authoritarian regimes towards norms of free-market democracy on the American model through engagement backed by the United States’ economic and military supremacy.

On basic empirical measures, the policy has been successful. In 1946, there were 21 democracies; today there are more than 80. The number of people living in democracies has risen to more than 4 billion from 385 million over that time, and the biggest authoritarian empire of the second half of the 20th century, the Soviet Union, has collapsed.

US President Donald Trump has thrown out that notion. He has declared that engagement with authoritarian regimes, including China, and perhaps particularly China, to bring them into convergence with the international system does not work for the United States, but diminishes it.

He has thus reverted to the late 19th century-early 20th-century view of international relations as a contest between great-power nation-states in the pursuit of national interests, with hard power being the final arbiter. This is what students of international relations call realism. They contrast its competitive and conflictual nature to the cooperation and shared values emphasised by liberalism.

The America First agenda on which Trump campaigned for office was a clear exposition of realism. The Trump presidency has now enshrined that as policy. Three newly published documents, the National Security Strategy (NSS), the Pentagon’s National Defense Strategy (NDS) and the US Trade Representatives annual report on China’s WTO compliance, lay out that sea-change in America’s stance in the world.

As far a China goes, it is now declared a revisionist power and a geostrategic rival along with Russia, Iran and North Korea.

It has been a policy switch in the making since the September 11, 2001 attacks on New York and Washington. The United States then started to act unilaterally to overthrow regimes perceived to be hostile through military intervention or the encouragement of local uprisings in Europe, Asia and the Middle East.

That was followed by the challenge that the global financial crisis of 2008 posed to both the Western model of free-market capitalism and the underlying assumption that the US was the nonpareil of economic strength.

The decade since 2008 has opened space for China to demonstrate that it has an alternative economic model — and one that is appealing to many regimes in as much as it came without the accompanying baggage of political liberalism. In place of untrammelled free trade, free capital flows and large-scale cross-border migration, China offered a model that uses markets to allocate some resources but in which the state continues to run the economy (and in China’s case the Party also runs the state).

The United States’s new NSS suggests this model of state-run capitalism has cost the United States hundreds of billions of dollars a year of commercial technology conveyed to China as a result of either the openness of the economic relationship on the US side or, as the Trump administration prefers to emphasise, through plain theft.

Trump has declared that that will stop. He repeated his intention in his first State of the Union address last month and has already made it evident by tariffs imposed on solar panels and refrigerators and stricter screening of inbound foreign investment on security grounds.

Trump has said he has held off on more punitive trade actions against China only because he needs its help on pressing North Korea’s leader Kim Jong-un to halt his nuclearisation programme.

This year is likely to test Trump’s patience in this regard, especially as this is a Congressional election year in the United States. The political support base that Trump needs to mobilise in the Republican cause, and particularly deindustrialised blue-collar workers, believe China to be the cause of everything ill that has befallen them. He will need to rile them up to vote.

The critical question about the trade measures that Trump takes against China — and it seems a matter of when not if — is their scope; whether they are narrow and targeted, say, anti-dumping duties on specific products such as types of steel and aluminum, as recommended by the US Commerce Department last week, or broad and sweeping, such as high duties on virtually anything shipped from China and a blanket ban on inward Chinese investment to the US.

If it is the former, the damage to the global economy (and US multinationals’ supply chains) would be containable; if it is the latter, the damage could be considerable.

The latter might satisfy Trump’s appetite for ’fair trade’ but at a massive cost to both the US and global economies.

As national security is the other pillar of Trump foreign policy, the proposed build up the US military and the expansion of the US nuclear weapon arsenal is also aimed at China. It has elicited the expected denunciation by Beijing, which accused Washington of reverting to a ‘Cold War mentality’.

It would be a mistake to regard the shift in US policy towards China as being particular to Trump. The latest issue of Foreign Affairs, the house journal of the blue-chip US foreign affairs think tank, the Council on Foreign Relations, carries an article entitled the The China Reckoning. The authors, Kurt Campbell, a former senior Obama-era official the State Department, and Ely Ratner, a former deputy National Security Advisor to the same administration, and who thus would both have been involved in President Barack Obama’s ‘Asian pivot’, write:

Neither carrots nor sticks have swayed China as predicted. Diplomatic and commercial engagement have not brought political and economic openness. Neither U.S. military power nor regional balancing has stopped Beijing from seeking to displace core components of the U.S.-led system. And the liberal international order has failed to lure or bind China as powerfully as expected. China has instead pursued its own course, belying a range of American expectations in the process.

This shift of position is also endorsed increasingly by US business, which has hitherto has been a strong advocate of engagement to open China’s vast and growing market to foreign trade and investment.

One of the intangible dangers in the new policy is the possibilities of missteps and missignalling resulting from a weakening of working relationships between officials at all levels. Many agency-to-agency channels built up over the past decades are on hiatus, and relatively few US officials are visiting China (or anywhere else). Of the high-level government-to-government economic dialogues only the military-to-military one appears still to be open, mostly on account of the need for channels on North Korea.

More broadly, the new policy will also likely reverse the long-standing practice by the United States of making unlimited provision of visas to Chinese journalists, researchers and students to visit, work and study in the United States while China strictly regulates the flow of their American counterparts in the opposite direction.

FBI director Christopher Wray told a US Senate Intelligence Committee hearing last week that Chinese students could be a threat since they could be gathering intelligence for China while studying in the United States.

A cutback in the number of foreign graduate students studying or researching in science and technology disciplines is under consideration by the White House as the FBI now considers them an intelligence risk. Wray told the Senate committee:

One of the things we’re trying to do is to view the Chinese threat as not just a whole of government threat, but a whole-of-society threat, on their end. And I think it’s going to take a whole-of-society response by us. It’s not just the Intelligence Community, but it’s raising awareness within our academic sector, within our private sector, as part of defense.

Wray also said that his agency was monitoring ‘warily’ the Confucius Institutes. The risk to the bilateral relationship is that such investigations stoke xenophobia public sentiment against Chinese activities in the United States.

Beijing’s soft power campaigns to influence politics and civil society abroad are also likely to fall under greater US suspicion, especially in light of the Mueller investigation into Russian attempts to interfere with US elections.

For its part, Beijing no longer describes its policy objectives in terms of convergence with international norms. Instead, it emphasises the differences brought by doing everything ‘with Chinese characteristics’. It has been building an alternative architecture, such as new multilateral mechanisms like the Asian Infrastructure Investment Bank and the Belt and Road Initiative, even as it continues to seek more influence in existing institutions such as the IMF, WTO and United Nations.

Beijing has been taking a more aggressive foreign-policy posture since 2008 when it believed it saw a United States entering into a period of accelerating relative decline which created an opportunity for it to act more assertively on the global stage. This posture has intensified since Xi Jinping’s rise to power in 2013. In particular, it has become more transparent about its desire to displace the United States as the preponderant regional power.

Two examples that are cases in point: island building and increasing military deployment in the South China Sea to reinforce China’s claims over the waters and resources off its eastern coasts; and its disruption of trade and tourism with South Korea following Seoul’s decision to permit deployment of the US THAAD missile defence system.

That goes hand in hand with the modernisation of the People’s Liberation Army, and particularly the PLA-Navy, which, eventually, will challenge US naval control of the Western Pacific.

There is a certain irony in two powers pursuing their national interest using not dissimilar mercantilist and military-minded means. China and the United States are following a similar model, though perhaps in not the way round that Washington had for so long imagined.

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China Reaffirms Its Arctic Ambition

Drift ice in the Arctic Ocean seen from the deck of the Chinese icebreaker Xue Long, 2010. Photo credit: Timo Palo. Licenced under Creative Commons

THIS BYSTANDER NOTED China’s Arctic ambition as long ago as 2010. Since then global warming has made northern shipping routes from Asia to Europe through the Arctic only more feasible as summer sea ice has further diminished.

In 2013, China acquired observer status at the Arctic Council, which comprises nations with an Arctic littoral (full members) or an interest in the region (observers). The previous year, the Ukraine-built diesel-powered Xue Long (Snow Dragon; seen above in 2010) then the world’s largest non-nuclear icebreaker, had made the first passage from China to Iceland through the far north.

It has been participating in Arctic research trips since 1999; China has had a research station on the Spitzbergen Archipelago since 2004. A larger and stronger indigenously designed version, the Xue Long 2, is due to come into service next year. It will be a hybrid research vessel-ice breaker that can carry up to 90 scientists and crew. Nuclear-powered icebreakers will follow. Development contracts were signed between the National Nuclear Corporation and State Shipbuilding Corporation in 2016.

Not only would a northern route through the Arctic lessen the costs and dangers of shipping Chinese goods to Europe via the traditional and lengthier sea routes through the Moluccan Straits, the Indian Ocean and the Horn of Africa, it would also make drilling for oil and gas a practical possibility. The region may hold up to a quarter of the world’s untapped fossil energy reserves.

On Friday, the State Council Information Office, the government information office directed towards foreign audiences, released an English-language white paper, China’s Arctic Policy, that sets out Beijing’s intentions towards the development (and conservation) of Arctic resources over the coming decades, in particular, shipping routes.

It manages to slip in the presumably intentionally eye-catching phrase, Polar Silk Road, there times but the document is mainly an affirmation of the long-standing position that China sees itself as having interests in the Arctic and intends to be active in the region’s economic development and governance.

Chinese mariners, fishermen, scientists, petroleum engineers and even tourists plying the increasingly less icy waters of the Arctic in ever more significant number, will concern Russia, for one. The United States will see yet more evidence of China’s asserting itself globally, notably when the white paper says responsibility for the region now goes beyond the eight nations, including Russia and the United States, with territorial sovereignty in the Arctic.

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China’s Economy: Normal Slowing Will Resume in 2018

THE ECONOMY STORMED along in the second half of last year, taking growth for the year to 6.9%, comfortably outstripping the official target of ‘around 6.5%’.

It was riding the coattails of the fiscal stimulus introduced in the first half of the year and also the pick-up in global trade, partly helped by the robust growth in the United States and some recovery in Europe, which boosted China’s exports. At 8.7% of China’s GDP growth, net export volumes made their largest contribution to growth since 2008.

Policymakers have been managing a slowdown from the giddy decades of double-digit growth. The overall lesson from last week’s figures is that economy is fitfully rebalancing and that there was some slowdown in credit growth as official efforts to cool the property market, deleverage and upgrade industrial capacity gained some traction.

That last year turned out to be the first acceleration since 2010 should prove to be an anomaly. Normal slowing will resume this year. And especially if policymakers push ahead with measures to control financial risks.

The most recent forecast from the World Bank, which recently upped its estimate of GDP growth in 2017 to 6.8% (a 0.3 percentage point increase from its forecast a year ago and reiterated in June) says it expects 6.4% growth this year (a 0.1 percentage point increase from its previous number).

Beijing has plenty of headroom in meeting its 2010 target of doubling aggregate and per capita growth by 2020. The economy needs to average no more than 6.3% growth to achieve that.

That headroom will also let Beijing tackle its most pressing economic-related problems: curbing escalating debt; cutting excess heavy industrial capacity; becoming environmentally cleaner; and dealing with the risk of unemployment as the economy is rebalanced towards domestic consumption and higher-value-added manufacturing.

Where the margins of safety are considerably thinner is if there is a trade war with the United States.

As we noted recently, US President Donald Trump is itching to impose tariffs on Chinese steel and aluminium imports into the United States. More recently Washington has said that an investigation into intellectual property transfers to China has been launched, with Trump warning that China is in for “a very big intellectual property fine”.

His self-restraint because he needs Beijing’s help with North Korea is wearing thin. Nor will it have been helped by the revelation that an ex-CIA officer arrested in New York this week may have been the mole responsible for passing information to Chinese intelligence that led to the dismantling and death of the CIA’s intelligence network in China between 2010 and 2012.

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China Caught Between Smuggled Oil And Trade Wars

BOTH CHINA AND Russia deny Western accusations that their vessels have been involved in ship-to-ship transfers of oil on the high seas to North Korean tankers in likely contravention of UN sanctions against the Pyongyang regime for its missile testing programme.

Since November, South Korea has detained two ships — one Hong Kong- and the other Panama-registered, alleged to have been involved in such transactions while the UN Security Council has blocked three North Korean- and one Palau-flagged ships from docking at international ports on suspicion of carrying or transporting goods banned by sanctions.

The United States has a list of six more such vessels it wants internationally sanctioned, five China-flagged and one Hong Kong-flagged. Last week, Beijing blocked Washington’s efforts at the UN to have the six ships blacklisted.

In September, the UN cut North Korea’s allowed imports of refined oil to 2 million barrels a year. Its latest round of sanctions further cut the annual quota to 500,000 tonnes and 4 million barrels of crude oil, required the repatriation of all North Korean contract workers abroad within 24 months, and a crackdown on ships smuggling banned items including coal and oil to and from the country.

The United States had wanted a complete ban on oil imports and a freeze of the overseas assets of the government and its leader, Kim Jong-un. That it did not get them, seems to have frayed the patience of the ever-mercurial US President Donald Trump. He told the New York Times last week,

“I have been soft on China because the only thing more important to me than trade is war…If they’re helping me with North Korea, I can look at trade a little bit differently, at least for a period of time. And that’s what I’ve been doing. But when oil is going in, I’m not happy about that.”

Trump had earlier tweeted that China had been “caught RED HANDED” (his all caps) allowing oil into North Korea.

The prompt for that public accusation was a Chosun Ilbo report quoting South Korean government sources as saying that U.S. spy satellites had detected Chinese ships transferring oil to North Korean vessels about 30 times since October. Which is a very roundabout way for a US president to make an accusation based on his own country’s intelligence, especially since U.S. State Department officials have confirmed Washington had evidence that vessels from several countries, including China, had engaged in transshipping oil products and coal to North Korea.

China had long turned a blind eye to smuggling to North Korea but in 2017 started to crack down on it as it shifted stance and began to turn the economic screws on Pyongyang.

The question now is whether Beijing is still turning a selective blind eye. Or is North Korea’s smuggling network, which includes bartering via Russian ports and forging the nationalities and destinations of ships, so well organised that it is beyond being able to be shut down?

The broader concern is that either way Trump will take it as an excuse to move onto his confrontational anti-China trade agenda in 2018. Trump has long argued that foreign countries are taking advantage of America and that America needs to fight back — and that is a message he wants to use to rile up his base support, in 2018 ahead of the US mid-term elections, and again in 2020 when he will be running for re-election as president.

The White House is split on the wisdom of starting a trade war. However, the word from our man in Washington is that the ‘America First’ economic nationalists among Trump’s advisors are currently ascendant and pushing to strike early ahead of the mid-terms while the president himself is itching to slap tariffs first on Chinese electronics and then on steel and aluminium.

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China Trade Does America A Service

US PRESIDENT DONALD Trump lambasted cheap Chinese imports for destroying American jobs when he was on the campaign trail last year.

A National Bureau of Economic Research working paper by Robert Feenstra of the University of California, Davis and Akira Sasahara of the University of Idaho, which  recently came across our desk though published in August, suggests the damage may not have been as extensive as previously thought once the gain in jobs from US exports to China are taken into account.

Looking at the impact of trade on employment in the United States from 1995 to 2011, the authors say:

For merchandise exports and imports from China, we have found added demand of 3.7 million jobs and reduced demand of 2.0 million jobs, respectively, giving a net gain of 1.7 million jobs.

Including services trade, Feenstra and Sasahara count a much larger net gain of 4 million jobs.

Different modelling approaches give some variation of results, showing that in merchandise trade the net job gain from the China trade could have been as low as 730,000 jobs or as high as 2.7 million and for trade in all sectors from 4 million to 5.1 million jobs. But all show a net gain in jobs.

At least some of that growth will have been as a result of China’s growth stimulating global growth and thus world trade.

Previous studies have estimated that since China’s accession to the World Trade Organization in 2001, unleashing the ‘China shock’ on world trade, Chinese imports accounted for one-quarter of the decline in U.S. manufacturing employment and have contributed to the unusually slow employment growth following the 2008 financial crisis.

Imports from China — or anywhere — else have twin effects. They create import competition and labour-market dislocation, but also benefit domestic consumers through lower prices. Trump concentrated on the former.

But what Feenstra and Sasahara highlight is the importance of services in the United States’ global trade. Thus Trump’s emphasis on restoring manufacturing jobs, if politically salient, is economically misplaced.

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A President At Court

Donald Trump seen in Washington, November 2011. Photo credit: Gage Skidmore. Licenced under Creative Commons

IT IS THE time US President Donald Trump spends in Beijing that will be the most critical part of his more-than-weeklong tour of five Asian countries that he started this weekend.

To the other four countries on his itinerary — Japan, South Korea, Vietnam and the Philippines — he will offer some measure of assurance that the United States’ traditional security guarantees to the region can be squared with his ‘America First’ economic nationalism.

Trump’s withdrawal from the Trans-Pacific Trade Partnership (TPP), a cornerstone of his predecessor Barack Obama’s ‘Asian pivot’, has been deeply felt with some concern across the region. Nowhere less so than in Japan, where Prime Minister Shinzo Abe had invested considerable political capital in TPP and must now still assume the role of the principal regional counterweight to China.

The Trump administration is increasingly referring to the region as the Indo-Pacific, not Asia-Pacific, to diminish the Asia part, which to most Americans implies Chinese. The two regions are not the same to a geologist or marine biologist,  but the co-option of the term by geopolitical strategists is blurring the distinction. However, it will take more than rebranding to assuage Asian allies’ anxieties.

In Beijing, the mood will be very different. Trump will be pampered and feted at the court of ‘the King of China’, to use Trump’s phrase. The US businessmen accompanying the US president will sign multi-billion dollar sales deals that will help to diminish China’s trade surplus with the United States, but in designated sectors, notably energy, of Beijing’s not the free-market’s choosing.

Discussions about North Korea have potential to be contentious, but Trump may well find himself an uncharacteristically restrained guest as Xi holds to China’s ‘dual approach’ line and stresses the need to get all parties back to the negotiating table.

Most of all Beijing will project the visit of a meeting of two superpowers, who will jointly “map out a blueprint for the development of bilateral ties in a new era”, as Vice Foreign Minister Zheng Zequang puts it. China-America First, perhaps, but every photo opportunity will be carefully used to convey which of the two leaders is the great draftsman.

It is a formula that worked well for China when Xi visited Washington in January. On these trips, the optics are as, if not more important than the outcomes.

As soon as Trump has departed Beijing, Xi will head to the Asia-Pacific Economic Cooperation (APEC) summit in Danang in Vietnam. Trump, too, will be there, and the allies and adversaries on both sides will make their judgements about which of the two superpowers will figure most prominently in their lives.

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